One of the big success stories of do-it-yourself superannuation over the past decade has been account-based pensions. For a self-managed super fund, their appeal is multifold.

To start with, it’s a simple transition to move from the superannuation savings stage in a DIY fund to the retirement income stream or pension phase.

If you have a successful investment strategy, there is no need to change anything.

Such a move is made all the more attractive by an entitlement to pay no tax on the investment earnings from a super account from which a pension is being paid. Another attraction for those over 60 is not having to pay tax on pension income payments.

Yet a further boon is the scope for them to continue to be paid to a spouse or financial dependant on the death of a member without the slightest hiccup in income flow and entitlements, as long as this is properly organised.

Whereas other financial assets frequently come with strings attached when they are passed on to beneficiaries on death, a DIY super pension that is automated to continue to be paid to an eligible beneficiary (most commonly a spouse) can be very streamlined.

Organising a super pension to continue as a “reversionary" pension, as the exercise is described, can be a very neat way to go for those who wish to retain their retirement savings in super for as long as possible, says pensions specialist Peter Crump, of ipac South Australia.

This is because it can be organised in advance with both partners involved. Knowing how a late partner’s superannuation death benefit will be treated is one less thing to think about at a time when there are often more than enough other distractions, Crump says.

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Further, if the pension is normally paid into a joint bank account, all payments can continue without anyone needing to interfere.

Having all super going into a joint bank account can be very useful in terms of simple estate planning, as it avoids issues that can arise if the payments are instead made to a late member’s personal bank account. Such accounts can be frozen on a member’s death until a bank is given either letters of administration or there is a grant of probate on the member’s estate.

Yet another topical reason for considering a reversionary pension instruction between now and the end of the 2014 calendar year is the government’s proposal to change the Centrelink age pension income test rules that apply to superannuation pensions.

From January 2015, instead of super income being assessed for the age pension income test on the amount of income paid, less a special deduction that is based on the pension account balance and the member’s life expectancy, it will be assessed in the same way as other financial assets.

The account balance will each year be deemed to earn a particular amount of income below and above a threshold amount, regardless of the actual income earned. The current deeming rate for a single retiree eligible for the age pension is 2 per cent on the first $46,600 of an account balance and 3.5 per cent on the remainder. For a retiree couple, the 2 per cent rate applies to the first $77,400 of an account balance with 3.5 per cent on the remainder.

AMP Tapin technical strategy manager John Perri says the current age pension income-test assessment regime with its special deduction is more favourable from an age pension entitlement perspective than the proposed switch to the deeming system.

And the current treatment will be even more favourable when the deeming rates increase, which happens when interest rates rise.

Deeming rates are at their lowest-ever levels and have been as much as 4 per cent below and 6 per cent above the threshold.

A single 65-year-old home-owning retiree, for instance, with $185,000 in an account-based pension, from which the minimum 5 per cent pension income is being withdrawn, could be about $860 a year better off under current rules than the proposed deeming rules, Perri says.

If the deeming rates for this retiree were instead 3.5 per cent and 5 per cent below and above the $46,600 threshold, their annual pension entitlement would be nearly $2250 better under the current income test rules.

This makes a right to stay with the current regime under a grandfathering proposal an appealing proposition for those able to do so.

Grandfathering is available to those who have started an account-based pension before January 2015 and who are also getting a Centrelink age pension. Where a retiree does qualify for grandfathering, Perri says, having a reversionary instruction as part of the pension can allow the more favourable special deduction treatment to continue to a reversioner so long as he or she is receiving the age pension at the time of the reversion.

The reversionary instruction comes with other important conditions, one of which is basing the special deduction calculation that is determined when the pension starts on the longest life expectancy of the member and the reversioner.

This is necessary to ensure the pension remains the same when it passes on to the reversioner.

Using the longer life expectancy reduces the special deduction entitlement that can be claimed against the income that is counted under the income test. For example, a 65-year-old male retiree can claim a special deduction based on an 18.54-year life expectancy, but if the reversioner is a female of the same age, the pension’s special deduction must be based on her longer 21.62-year life expectancy.